Principles of Economics | Report | Assignment

Running head: PRINCIPLES OF ECONOMICS
Principles of Economics
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1PRINCIPLES OF ECONOMICS
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Conclusion.......................................................................................................................................7
Reference.........................................................................................................................................8

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Introduction
Economics helps to understand socio-economic operations. An economy runs around several
principles and those keep the economy of the world running. This report focuses on the principle
of economics and explains how those principles work in an economy. The major principles of
economics are tradeoff, everything has a cost, decisions are made at the margin and people
respond to incentives. These are the principles that directly impact the individuals. Other
principles are trade improves welfare, it is better to attain economic stability through free market,
intervention of the government is sometimes necessary to have a better outcome and level of
productivity decides standard of living of a country. There are more principles of economics that
the report discusses in the following paragraphs.
Discussion
The inflation rate and the unemployment rate are related to each other
The relationship between the unemployment rate and the inflation rate shows that with an
increase in the unemployment rate, the inflation rate declines and conversely, with a rise in the
inflation rate, the unemployment rate falls. This is relationship is explained by Phillips curve1.
This happens because the higher unemployment rate decreases the income of the people and thus
there is a decline in aggregate demand due to the fall in consumption. This results in fall in price
level of goods and services and thus inflation rate falls. On the other hand, with lower
1 Sayeed, J, M Islam, & S Yasmin, "Does the US economy face a long-run trade off between
inflation and unemployment?.". in International Journal of Monetary Economics and Finance,
12, 2019, 118-132.

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unemployment rate income of people rises that causes consumption to rise. With induced effect,
aggregate demand will rise and thereby price level increases and causes inflation rate to rise.
Printing excessive money increases prices of products
The rise in the price level of an economy is called inflation. With an increase in money
supply inflation occurs. Money supply can be increased by printing more amount of money and
flushing them into the economy2. With an increased amount of money in the economy given the
amount of goods and services unchanged, the value of money depreciates which causes the price
level to rise which means inflation occurs. This would mean that if the government prints more
money price rises in the economy.
Level of productivity decides standard of living of a country
The production capacity of a country influences its standard of living because with higher
production the amount of goods and services available per citizen increases3. Thus, with more
amount of goods and services available for consumption the welfare of citizens is a higher and
thus higher standard of living. The production ability of a country depends on its productivity.
Therefore, high productivity leads to more production of goods and services in a country in a
specified period. Therefore, countries having more production ability have a high standard of
living. For example, the standard of living is higher in Germany than in Afghanistan since
Germany has more production ability.
2 Greenlaw, David Shapiro Steven A., and David Shapiro. Principles of Economics 2e.
OpenStax, 2017.
3 Mankiw, N, Principles of Economics. in, Cengage Learning, 2020.

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Intervention of the government is sometimes necessary to have a better outcome
It has been observed that under a free market, in many cases the efficient allocation of
goods and services does not takes place. This inefficiency in the market is called market failure.
It has been found that to improve the condition of inefficient market allocation some external
rules and regulations needed to be introduced. Here, the role of government comes in to play.
The government imposes suitable and effective rules and regulations that minimize or removes
the inefficiency existing in the market and thereby improves market outcomes. For example, the
government imposes pollution tax on factory productions to reduce pollution and thereby
improves the market condition.
It is better to attain economic stability through free market
In a market, there are millions of households interact with each other regularly. The
interaction occurred due to everyone's need for goods and services and due to this reason,
negotiation of prices of goods and services takes place. The demand for goods and services
generated from the self-interest of the people4. Therefore, in the market economy, there is no
need for any centralized regulatory system that would set the market operation of rules since it
may create a conflict of interest and thus disrupt the free negotiation procedure. In this way,
consumers can take a free decision. However, if there is government intervention then the free
decision of consumers is influenced.
Trade improves welfare
4 Rodrik, Dani. "What do trade agreements really do?." Journal of economic perspectives 32.2
(2018): 73-90.

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Trade means the exchange of goods and services between two countries and this way
both can enjoy more number of goods and services since no country can produce everything it
needed. Therefore, trading increases the chances of availability of all the necessaries. Therefore,
by engaging in trade everyone is better off. For example, Country X produces pineapple and
Country Y produces apple. Now, if the countries engage in trade then both can enjoy the
consumption of pineapple and apples which is not possible without trade. Thus, the trade makes
everyone better off.
People respond to incentives
Incentive plays a great role in impacting behaviors of people. In a decision where a
person can gain more socially and economically than any other decision then the person will
make the previous decision5. For example, the price of rice increases in comparison to wheat
then a person will move its choice of purchase from rice to wheat because saving incentive is
higher in the case of wheat.
Decisions are made at the margin
A person before making any decision always thinks of what he or she will get by
deciding on taking additional action. Hence, if the benefit the person gets is of more worth than
the additional action taken then this decision is called the marginal change in decision.
5 Miller, David. "Distributive Justice: What the people think." Distributive Justice. Routledge,
2017. 135-173.

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Therefore, it can be said that rational people think at the margin. For example, if a person takes a
taxi instead of a bus to reach the airport early then he would compare the gain in marginal benefit
of reaching early to the marginal rise in cost due to traveling by taxi and hence benefit is higher
then only he will take a taxi.
Tradeoff
In economy to get something one needs to pay its price, it means that something has to be
sacrificed6. For example, if a country makes more investment in the industrial sector then the
investment in the agricultural sector has to be sacrificed. Hence, without tradeoff, nothing can be
achieved.
Everything has a cost
From tradeoff, it is clear that to get something one needs to pay something in return. For
example, if a person is taking classes in university then he or she apart from paying the tuition
fee sacrifices the opportunity of doing a job. Thus, there is cost for every decision a person
makes.
6 BurnSilver, Shauna, et al. "Modeling tradeoffs in a rural Alaska mixed economy: Hunting,
working, and sharing in the face of economic and ecological change." The Give and Take of
Sustainability: Archaeological and Anthropological Perspectives on Tradeoffs. Cambridge
University Press, 2017. 52-83.

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Conclusion
From the above discussion about the principles of economics, it can be understood it is
not possible to avoid the principle of economics since they are the basic thing on which an
economy is running. Trade is the key factor on which the total economy and principles of
economies are based. To purchase one must trade something in return. In making decision costs
and benefits analysis is needed and this case tradeoff between cost and benefit is done. Similarly,
the relationship between money supply and price and inflation and unemployment are all based
on the concept that is the tradeoff.

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Reference
BurnSilver, Shauna, et al. "Modeling tradeoffs in a rural Alaska mixed economy: Hunting,
working, and sharing in the face of economic and ecological change." The Give and Take of
Sustainability: Archaeological and Anthropological Perspectives on Tradeoffs. Cambridge
University Press, 2017. 52-83.
Greenlaw, David Shapiro Steven A., and David Shapiro. Principles of Economics 2e. OpenStax,
2017.
Mankiw, N, Principles of Economics. in , Cengage Learning, 2020.
Miller, David. "Distributive justice: What the people think." Distributive Justice. Routledge,
2017. 135-173.
Rodrik, Dani. "What do trade agreements really do?." Journal of economic perspectives 32.2
(2018): 73-90.
Sayeed, J, M Islam, & S Yasmin, "Does the US economy face a long run trade off between
inflation and unemployment?.". in International Journal of Monetary Economics and Finance,
12, 2019, 118-132.